How To Use the Snowball Method to Eliminate Your Debt

According
to major news sources more than fifty percent of Americans are mired
in debt. If you are one of those people then the very best thing you
can do for yourself is get out of debt and start building your
personal wealth. The benefits are obvious. When you eliminate your
debt your paycheck becomes your own. When you eliminate your debt
your life
becomes your own. Using the snowball method to compound the principle
will help you achieve this goal.

You
can start right now, but if your spending is out of control or if you
have not created and held fast to a budget it will be much harder to
successfully complete. I would suggest that you first read and apply
How
To Take Control of Your Spending.
After you have done that, you will want to read about and create a
budget. This article will get you on your way:How To Set Up A Personal Budget.

Things You Will Need

All
your debts showing minimum payments and current balance

A
Spreadsheet for Record Keeping

Tip: Clicking an image will enlarge it so you can see the example screenshots

Step 1

Make
a list of all your debts. For this article your debts are anything
that you owe money on, will have an effect on your credit report, and
lists a minimum required payment. On this list you need to list who
you owe, how much the minimum payment is, and about how long it will
take you pay it off. Exact payoff time is only an estimate since
interest often accrues daily. But, a general figure will be
sufficient.

Step 2

Sort
the list so that the shortest payoff is number one and the longest is
the last on the list. We are going to attack this list by killing
each debt one at a time. Your creditors use the power of compound
interest against you. We are going to use the snowball
method
and the power of compound
principal against
them.

Step 3

On
the first of the month begin to put the snowball method into action.
You will pay every payments minimum payment only, except the top one.
For now you are going to cut your discretionary funds by about half.
Add that half to the number one payment.

By
doing this, you are taking a chunk of principal of the debt. The next
month when they compute how much to charge you in interest they will
have X number of dollars less on the principal to levy that interest
on. Let's look at the math so you can see it clearly.

January
Balance Due: $100.00 Minimum
Payment: $5.00 You
Paid $8.00

That
extra three dollars must come off the principle balance of $100. Your
interest is computed first, and virtually all your 5.00 minimum is
interest. This way they keep the principle high and can charge nearly
the same amount of interest next month. Your 3.00 just maxed their
principle to 97.00. So your next 5.00 will have slightly more going
to principle than it had this month because the principle is reduced
by a minimum of 3.00.

Each
month you will pay all your minimums, and you will add however much
you can afford to the payment of that top debt. When that debt is
cleared you will have won the first battle in the war using the
compound principle.

Step 4

When
the first debt is cleared, move it from the active debts portion your
list. Now take the minimum payment from that paid off debt, in this
case 3.00, and add it to the minimum payment of the next
debt on the list.
You are now using the snowball
method
and the compound principle to your own benefit. Take a look at the
picture and you will see it in action. The picture illustrates simple math from one payment. The fact is that the progression isn't linear. It is a very steep hill, hence the name snowball method. Your payoff will reduce itself far faster than simple math can illustrate here.

Repeat step four until the second debt is paid off. Then apply the minimum
payments from debt one and debt two to the minimum for debt three.
Your snowball is getting larger. If you keep this up, we'll have to
change the title from the snowball
method
to the avalanche method. Compounding the principle works. And you can
compound the principle all the way up to paying your mortgage off if you
desire.

Tips & Warnings

The
compound principle used in the snowball method works best when you
are able to double or triple your minimum payment. If you can reduce
your spending to add more money to the snowball, or even take a
second job, the snowball method will work far faster than this simple
article illustrates.